ECB: Global trade war would threaten stability

World
Europe

The impact of rising protectionism on financial markets has been "contained", European Central Bank (ECB) researchers said in a paper published Tuesday, while warning of graver risks if a trade war goes global.

"The total market impact of tariff-related news appears to have remained relatively contained so far and balanced across areas" in stock and bond markets, the economists said – although firms and sectors directly affected have suffered much worse.

But "an escalation to a more generalized trade war" – in which all countries imposed border taxes on one another's imports – could cause "strong financial market corrections", they warned.

The Frankfurt institution's analysis comes at the end of a year of escalating protectionist threats and measures by U.S. President Donald Trump, especially against the world's second economy China.

During 2018 Trump's tariffs have risen to 300 billion U.S. dollars, with more than 250 billion U.S. dollars targeted at Chinese imports, along with a tariff on steel and aluminum that also covers other countries' products.

"Cumulative changes in (the) U.S. and euro area equity prices in response to tariff-related announcements have been roughly comparable so far, amounting to around minus 7.0 percent," the ECB researchers found.

Pointing to the much worse performance of companies and sectors directly targeted by tariffs, they predicted that "should the threat of an increase in tariffs be extended to cover products across all sectors of the economy, a larger overall market impact can be expected."

Source(s): AFP